nep-mon New Economics Papers
on Monetary Economics
Issue of 2020‒03‒02
fifty-one papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Monetary Policy Is Not Always Systematic and Data-Driven: Evidence from the Yield Curve By Ales Bulir; Jan Vlcek
  2. More Gray, More Volatile? Aging and (Optimal) Monetary Policy By Baksa, Dániel; Munkácsi, Zsuzsa
  3. Output Hysteresis and Optimal Monetary Policy By Vaishali Garga; Sanjay R. Singh
  4. Zombie International Currency: The Pound Sterling 1945-1973 By Maylis Avaro
  5. Why Pay Interest on Excess Reserve Balances? By Heather Wiggins; Laura Lipscomb; Antoine Martin
  6. The Chair of the U.S. Federal Reserve and the Macroeconomic Causality Regimes By Yunus Aksoy; Rubens Morita; Zacharias Psaradakis
  7. A Look at the Accuracy of Policy Expectations By Stefano Eusepi; Emanuel Moench; Richard K. Crump
  8. Macroprudential policy measures: macroeconomic impact and interaction with monetary policy By Darracq Pariès, Matthieu; Karadi, Peter; Körner, Jenny; Kok, Christoffer; Mazelis, Falk; Nikolov, Kalin; Rancoita, Elena; Van der Ghote, Alejandro; Cozzi, Guido; Weber, Julien
  9. Capital inflows to emerging countries and their sensitivity to the global financial cycle By Ines Buono; Flavia Corneli; Enrica Di Stefano
  10. Micro Jumps, Macro Humps: Monetary Policy and Business Cycles in an Estimated HANK Model By Adrien Auclert; Matthew Rognlie; Ludwig Straub
  11. Monetary policy and bank stability: the analytical toolbox reviewed By Albertazzi, Ugo; Barbiero, Francesca; Marqués-Ibáñez, David; Popov, Alexander; d’Acri, Costanza Rodriguez; Vlassopoulos, Thomas
  12. Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area By Philippe Andrade; Filippo Ferroni
  13. Unemployment Fluctuations and Nominal GDP Targeting By Billi, Roberto
  14. The Optimal Inflation Target and the Natural Rate of Interest By Philippe Andrade; Jordi Gali; Hervé Le Bihan; Julien Matheron
  15. Why Is the Euro Punching Below Its Weight? By Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
  16. Mission Almost Impossible: Developing a Simple Measure of Pass-Through Efficiency By Thomas M. Eisenbach; Gara M. Afonso; Adam Biesenbach
  17. The Hidden Heterogeneity of Inflation Expectations and its Implications By Dräger, Lena; Lamla, Michael J.; Pfajfar, Damjan
  18. Inflation in Low-Income Countries By Ha,Jongrim; Ivanova,Anna; Montiel,Peter J.; Pedroni,Peter Louis
  19. Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions By Chatelain, Jean-Bernard; Ralf, Kirsten
  20. Monetary policy when preferences are quasi-hyperbolic By Richard Dennis; Oleg Kirsanov
  21. ARDL Bounds Tests for Neutrality and Superneutrality of Money towards Monetary Integration of West Africa By Mogaji, Peter Kehinde
  22. Monetary Policy, Rational Confidence and Neo-Fisherian Depressions By Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini
  23. How the Fed Smoothed Quarter-End Volatility in the Fed Funds Market By Alex Entz; John McGowan; Asani Sarkar
  24. Monetary Policy, Redistribution, and Risk Premia By Rohan Kekre; Moritz Lenel
  25. Probit Modelling and Evaluation of Banking Sector Fragility within the West African Monetary Zone. By Mogaji, Peter Kehinde
  26. How Unconventional Are Large-Scale Asset Purchases? By Carlo Rosa; Andrea Tambalotti
  27. Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach By Lian An; Mark A. Wynne; Ren Zhang
  28. Currency Compositions of International Reserves and the Euro Crisis By Laser, Falk Hendrik; Weidner, Jan
  29. Inflation Thresholds and Inattention By Anat Bracha; Jenny Tang
  30. U.S. Monetary Policy as a Changing Driver of Global Liquidity By Stefano Schiaffi; Stefan Avdjiev; Leonardo Gambacorta; Linda S. Goldberg
  31. Firms’ Asset Holdings and Inflation Expectations By Saten Kumar
  32. Optimal monetary policy in a New Keynesian model with heterogeneous expectations By Di Bartolomeo, Giovanni; Di Pietro, Marco; Giannini, Bianca
  33. On ‘Rusting’ Money Silvio Gesell’s Schwundgeld Reconsidered By Rehme, Günther
  34. A Closer Look at the Recent Pickup in Inflation By John Sporn; Andrea Tambalotti
  35. Inflation, uncertainty and labor market conditions in the US By Claudiu Albulescu; Cornel Oros
  36. Libra or Librae? Basket based stablecoins to mitigate foreign exchange volatility spillovers By Paolo Giudici; Thomas Leach; Paolo Pagnottoni
  37. Who’s Lending in the Federal Funds Market? By Alex Entz; Eric LeSueur; Gara M. Afonso
  38. Corporates' dependence on banks: The impact of ECB corporate sector purchases By Joost Bats
  39. The Euro Area Periphery Sovereigns' Fiscal Positions and Unconventional Monetary Policy By Oliver Hülsewig; Johann Scharler
  40. The interbank market puzzle By Allen, Franklin; Covi, Giovanni; Gu, Xian; Kowalewski, Oskar; Montagna, Mattia
  41. The impact of TLTRO2 on the Italian credit market: some econometric evidence By Lucia Esposito; Davide Fantino; Yeji Sung
  42. Liquidity preference in the Walrasian framework By Icefield, William
  43. Forward Guidance and Household Expectations By Olivier Coibion; Dimitris Georgarakos; Yuriy Gorodnichenko; Michael Weber
  44. Central Bank Imbalances in the Euro Area By Matthew Higgins; Thomas Klitgaard
  45. The Eurodollar Market in the United States By Marco Cipriani; Julia Gouny
  46. The Great Moderation, Forecast Uncertainty, and the Great Recession By Andrea Tambalotti; Ging Cee Ng
  47. Central Bank Digital Currency: Central Banking For All? By Jesús Fernández-Villaverde; Daniel Sanches; Linda Schilling; Harald Uhlig
  48. Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation By Daiki Maeda; Yuki Saito
  49. Fiscal Implications of the Federal Reserve’s Balance Sheet Normalization By Marco Del Negro; Carlo Rosa; Benjamin A. Malin; Jamie Grasing; Michele Cavallo; W. Scott Frame
  50. Global implications of a US-led currency war By Adam Triggs; Warwick J McKibbin
  51. Quest for Robust Optimal Macroprudential Policy By Aguilar, Pablo; Fahr, Stephan; Gerba, Eddie; Hurtado, Samuel

  1. By: Ales Bulir; Jan Vlcek
    Abstract: Does monetary policy react systematically to macroeconomic innovations? In a sample of 16 countries – operating under various monetary regimes – we find that monetary policy decisions, as expressed in yield curve movements, do react to macroeconomic innovations and these reactions reflect the monetary policy regime. While we find evidence of the primacy of the price stability objective in the inflation targeting countries, links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.
    Keywords: Bank rates;Central banks;Monetary policy;Central banking and monetary issues;Central bank policy;Monetary transmission,yield curve,rule-based monetary policy,WP,output gap,inflation expectation,inflation-targeting,policy innovation
    Date: 2020–01–17
  2. By: Baksa, Dániel; Munkácsi, Zsuzsa
    Abstract: The empirical and theoretical evidence on the impact of population aging on inflation is mixed, and there is no evidence regarding the volatility of inflation. Using advanced economies’ data and a DSGE-OLG model - a multi-period general equilibrium framework with overlapping generations - we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper shows how aging affects the short-term cyclical behavior of the economy and the transmission channels of monetary policy. We also examine the interplay between aging and optimal central bank policies. As aging redistributes wealth among generations, generations behave differently, and the labor force becomes more scarce. Our model suggests that aging makes monetary policy less effective, and aggregate demand less elastic to changes in the interest rate. Moreover, in grayer societies, central banks should react more strongly to nominal variables to compensate for higher inflation volatility.
    Keywords: aging; monetary policy transmission; optimal monetary policy; inflation targeting
    JEL: E31 E52 J11
    Date: 2020–02
  3. By: Vaishali Garga; Sanjay R. Singh
    Abstract: We analyze the implications for monetary policy when deficient aggregate demand can cause a permanent loss in potential output, a phenomenon we term output hysteresis. In the model, the incomplete stabilization of a temporary shortfall in demand reduces the return to innovation, thus reducing total factor productivity growth and generating a permanent loss in output. Using a purely quadratic approximation to welfare under endogenous growth, we derive normative implications for monetary policy. Away from the zero lower bound (ZLB), optimal commitment policy sets interest rates to eliminate output hysteresis. A strict inflation targeting rule implements the optimal policy. However, when the nominal interest rate is constrained at the ZLB, strict inflation targeting is suboptimal and admits output hysteresis. A new policy rule that targets output hysteresis returns output to its pre-shock trend and approximates the welfare gains under optimal commitment policy. A central bank that is unable to commit to future policy actions suffers from hysteresis bias, as the bank’s inconsistent policy does not offset past losses in potential output.
    Keywords: endogenous growth; zero lower bound; output hysteresis; optimal monetary policy
    JEL: E52 E61 O41
    Date: 2019–12–01
  4. By: Maylis Avaro (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper provides new evidence on the decline of sterling as an international currency, focusing on its role as foreign exchange reserve asset under the Bretton Woods era. Using a unique new dataset on the composition of foreign exchange reserves of central banks, I show that the shift away from the sterling occurred earlier than conventionally supposed for the countries not belonging to the sterling area. The use of sterling has been described as freely chosen, imposed by the Bank of England or negotiated. I argue that the sterling area was a captive market as the Bank of England used capital controls, commercial threats and economic sanctions against sterling area countries to limit the divestments of their sterling assets. This management of the decline of sterling benefited mostly Britain and the City of London but represented a cost for sterling area countries and the international monetary system.
    Keywords: Monetary and financial history; Foreign exchnage; International monetary system
    JEL: N24 F31 E58
    Date: 2020–02–25
  5. By: Heather Wiggins (Federal Reserve Board of Governors’ Division of Monetary Affairs); Laura Lipscomb (Federal Reserve Board of Governors’ Division of Monetary Affairs); Antoine Martin
    Abstract: In a previous post, we described some reasons why it is beneficial to pay interest on required reserve balances. Here we turn to arguments in favor of paying interest on excess reserve balances. Former Federal Reserve Chairman Ben Bernanke and former Vice Chairman Donald Kohn recently discussed many potential benefits of paying interest on excess reserve balances and some common misunderstandings, including that paying interest on reserves restricts bank lending and provides a subsidy to banks. In this post, we focus primarily on benefits related to the efficiency of the payment system and the reduction in the need for the provision of credit by the Fed when operating in a framework of abundant reserves.
    Keywords: monetary policy; reserve requirements; interest on reserves
    JEL: E5
  6. By: Yunus Aksoy; Rubens Morita; Zacharias Psaradakis
    Abstract: We investigate regime-dependent Granger causality between real output, inflation and monetary indicators and map with U.S. Fed Chairperson’s tenure since 1965. While all monetary indicators have causal predictive content in certain time periods, we report that the Federal Funds rate (FFR) and Domestic Money (DM) are substitutes in their role as lead or feedback variables to explain variations in real output and inflation. We provide a comprehensive account of evolution of causal relationships associated with all US Fed Chairpersons we consider.
    Keywords: causality regimes, domestic money, Federal Reserve Chairperson, Markov switching, policy instrument, vector autoregression
    JEL: C32 C54 C61 E52 E58
    Date: 2019
  7. By: Stefano Eusepi; Emanuel Moench (Deutsche Bundesbank; Halle (Saale); Bank für Internationalen Zahlungsausgleich); Richard K. Crump
    Abstract: Since the 1980s, the primary policy tool of the Federal Reserve has been the federal funds rate. Because expectations of the future path of the funds rate play a central role in the term structure of interest rates and thus the monetary transmission mechanism, it is important to know how accurate these expectations are in predicting the funds rate. In this post, we investigate this issue using a well-known survey of private sector forecasters. We find that forecasts tend to over-predict the funds rate in easing cycles and under-predict it in tightening cycles. In addition, while forecasts during tightening cycles have become more accurate over time, forecast accuracy during easing cycles has not improved.
    Keywords: macroeconomic forecasts; Taylor Rule; Policy expectations
    JEL: E5
  8. By: Darracq Pariès, Matthieu; Karadi, Peter; Körner, Jenny; Kok, Christoffer; Mazelis, Falk; Nikolov, Kalin; Rancoita, Elena; Van der Ghote, Alejandro; Cozzi, Guido; Weber, Julien
    Abstract: This paper examines the interactions of macroprudential and monetary policies. We find, using a range of macroeconomic models used at the European Central Bank, that in the long run, a 1% bank capital requirement increase has a small impact on GDP. In the short run, GDP declines by 0.15-0.35%. Under a stronger monetary policy reaction, the impact falls to 0.05-0.25%. The paper also examines how capital requirements and the conduct of macroprudential policy affect the monetary transmission mechanism. Higher bank leverage increases the economy's vulnerability to shocks but also monetary policy's ability to offset them. Macroprudential policy diminishes the frequency and severity of financial crises thus eliminating the need for extremely low interest rates. Counter-cyclical capital measures reduce the neutral real interest rate in normal times. JEL Classification: E4, E43, E5, E52, G20, G21
    Keywords: bank stability, credit, monetary policy
    Date: 2020–02
  9. By: Ines Buono (Bank of Italy); Flavia Corneli (Bank of Italy); Enrica Di Stefano (Bank of Italy)
    Abstract: We study how the effect of global and domestic factors on capital flows towards emerging economies has changed in the last 25 years. We find that both the global financial crisis and the so-called ‘taper tantrum’ event, when investors perceived the end of the US Federal Reserve’s unconventional monetary policy, triggered changes in the sensitivity of capital inflows to their main drivers. In particular, we provide evidence that during the period between the global financial crisis and the taper tantrum, international investors devoted less attention to domestic factors. Nevertheless, the taper tantrum marked the beginning of a new phase, characterized by increased sensitivity to both global factors and domestic vulnerabilities.
    Keywords: international capital movements, uncertainty, global financial cycle, VIX, non-linearities
    JEL: F21 F32 F42
    Date: 2020–02
  10. By: Adrien Auclert; Matthew Rognlie; Ludwig Straub
    Abstract: We estimate a Heterogeneous-Agent New Keynesian model with sticky household expectations that matches existing microeconomic evidence on marginal propensities to consume and macroeconomic evidence on the impulse response to a monetary policy shock. Our estimated model uncovers a central role for investment in the transmission mechanism of monetary policy, as high MPCs amplify the investment response in the data. This force also generates a procyclical response of consumption to investment shocks, leading our model to infer a central role for these shocks as a source of business cycles.
    Keywords: HANK, estimation, investment
    JEL: E21 E22 E32 E43 E52
    Date: 2020
  11. By: Albertazzi, Ugo; Barbiero, Francesca; Marqués-Ibáñez, David; Popov, Alexander; d’Acri, Costanza Rodriguez; Vlassopoulos, Thomas
    Abstract: The response of major central banks to the global financial crisis has revived the debate around the interactions between monetary policy (MP) and bank stability. This technical paper sheds light, quantitatively, on the different mechanisms underlying the relationship between MP and bank stability. It does so by reviewing microeconometric studies from the academic literature as well as those conducted internally at the ECB. The paper proceeds chronologically, using the recent crisis as a touchstone. First, it provides a brief overview of the main theoretical channels linking bank stability and the transmission of MP. It then analyses the evidence from the pre-crisis period in the light of the structural trends leading up to the crisis. As the crisis erupted, unconventional monetary policy (UMP) measures were deployed, and the paper suggests that these were essential to buttress bank stability and halt a systemic crisis. At the same time, these measures involved trade-offs, and the adverse spillovers on banks’ intermediation capacity and risk-taking require close monitoring. The paper ends by offering a critical review of the methodologies employed and suggestions for the areas where analytical efforts should be focussed in the future. JEL Classification: E4, E43, E5, E52, G20, G21
    Keywords: bank stability, credit, monetary policy
    Date: 2020–02
  12. By: Philippe Andrade; Filippo Ferroni (University of Surrey; Banque de France; Federal Reserve Bank of Chicago)
    Abstract: What drives the strong reaction of financial markets to central bank communication on the days of policy decisions? We highlight the role of two factors that we identify from high-frequency monetary surprises: news on future macroeconomic conditions (Delphic shocks) and news on future monetary policy shocks (Odyssean shocks). These two shocks move the yield curve in the same direction but have opposite effects on financial conditions and macroeconomic expectations. A drop in future interest rates that is associated with a negative Delphic (Odyssean) shock is perceived as being contractionary (expansionary). These offsetting effects can explain why central bank communication leads to a strong reaction of the yield curve together with a weak reaction by inflation expectations or stock prices. The two shocks also have different impacts on macroeconomic outcomes, such that central bankers cannot infer the degree of stimulus they provide by looking at the mere reaction of the yield curve. However, changes in their communication policy can influence the way markets predominantly understand communication about future interest rates.
    Keywords: central bank communication; yield curve; monetary policy surprises; signaling; forward guidance
    JEL: C10 E32 E52
    Date: 2019–07–01
  13. By: Billi, Roberto (Research Department, Central Bank of Sweden)
    Abstract: I evaluate the welfare performance of a target for the level of nominal GDP in a New Keynesian model with unemployment, accounting for a zero lower bound (ZLB) constraint on the nominal interest rate. Nominal GDP targeting is compared to employment targeting, a conventional Taylor rule, and the optimal monetary policy with commitment. I find that employment targeting is optimal when supply shocks are the source of fluctuations; however, facing demand shocks and the ZLB constraint, nominal GDP targeting can outperform substantially employment targeting.
    Keywords: employment targeting; optimal monetary policy; Taylor rule; ZLB
    JEL: E24 E32 E52
    Date: 2020–01–01
  14. By: Philippe Andrade; Jordi Gali; Hervé Le Bihan (Banque de France); Julien Matheron (Banque de France)
    Abstract: We study how changes in the steady-state real interest rate affect the optimal inflation target in a New Keynesian DSGE model with trend inflation and a lower bound on the nominal interest rate. In this setup, a lower steady-state real interest rate increases the probability of hitting the lower bound. That effect can be counteracted by an increase in the inflation target, but the resulting higher steady-state inflation has a welfare cost in and of itself. We use an estimated DSGE model to quantify that tradeoff and determine the implied optimal inflation target, conditional on the monetary policy rule in place before the financial crisis. The relation between the steady-state real interest rate and the optimal inflation target is downward sloping. While the increase in the optimal inflation rate is in general smaller than the decline in the steady-state real interest rate, in the currently empirically relevant region the slope of the relation is found to be close to –1. That slope is robust to allowing for parameter uncertainty. Under “make-up” strategies such as price level targeting, the required increase in the optimal inflation target under a lower steady-state real interest rate is, however, much smaller.
    Keywords: inflation target; effective lower bound; natural interest rate; steady-state real interest rate
    JEL: E31 E52 E58
    Date: 2019–10–01
  15. By: Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: On the twentieth anniversary of its inception, the euro has yet to expand its role as an international currency. We document this fact with a wide range of indicators including its role as an anchor or reference in exchange rate arrangements—which we argue is a portmanteau measure—and as a currency for the denomination of trade and assets. On all these dimensions, the euro comprises a far smaller share than that of the US dollar. Furthermore, that share has been roughly constant since 1999. By some measures, the euro plays no larger a role than the Deutschemark and French franc that it replaced. We explore the reasons for this underperformance. While the leading anchor currency may have a natural monopoly, a number of additional factors have limited the euro’s reach, including lack of financial center, limited geopolitical reach, and US and Chinese dominance in technology research. Most important, in our view, is the comparatively scarce supply of (safe) euro-denominated assets, which we document. The European Central Bank’ lack of policy clarity may have also played a role. We show that the euro era can be divided into a “Bundesbank-plus” period and a “Whatever it Takes” period. The first shows a smooth transition from the European Exchange Rate Mechanism and continued to stabilize German inflation. The second period is characterised by an expanding ECB arsenal of credit facilities to European banks and sovereigns
    JEL: E5 F3 F4 N2
    Date: 2020–02
  16. By: Thomas M. Eisenbach (Leonard N. Stern School of Business; Federal Reserve Bank of New York); Gara M. Afonso; Adam Biesenbach (Markets Group)
    Abstract: Short-term credit markets have evolved significantly over the past ten years in response to unprecedentedly high levels of reserve balances, a host of regulatory changes, and the introduction of new monetary policy tools. Have these and other developments affected the way monetary policy shifts ?pass through? to money markets and, ultimately, to households and firms? In this post, we discuss a new measure of pass?through efficiency, proposed by economists Darrell Duffie and Arvind Krishnamurthy at the Federal Reserve?s 2016 Jackson Hole summit.
    Keywords: interest rate dispersion; money markets; monetary policy transmission
    JEL: E5 G1
  17. By: Dräger, Lena; Lamla, Michael J.; Pfajfar, Damjan
    Abstract: Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of the perceived real interest rate. Furthermore, these differences in opinions affect German households differently depending on whether they are renters or homeowners.
    Keywords: Macroeconomic expectations, monetary policy perceptions, survey microdata
    JEL: E31 E52 E58 D84
    Date: 2020–02
  18. By: Ha,Jongrim; Ivanova,Anna; Montiel,Peter J.; Pedroni,Peter Louis
    Abstract: This paper studies the effects of global and domestic inflation shocks on core price inflation in 105 countries between 1970 and 2016, by using a heterogeneous panel vector-autoregressive model. The methodology allows accounting for differences across groups of countries (advanced economies, emerging markets and developing economies, and low-income countries) and across groups with different country characteristics (such as foreign exchange and monetary policy regimes). The empirical results indicate that most of the variation in inflation among low-income countries over the past decades is accounted for by external shocks. More than half of the variation in core inflation rates among low-income countries is due to global core price shocks, compared with one-eighth in advanced economies. Global food and energy price shocks account for another 13 percent of core inflation variation in low-income countries -- half more than in advanced economies and one-fifth more than in emerging markets and developing economies. This points to challenges in anchoring domestic inflation expectations, which have been most evident among low -- income countries with floating exchange rates, especially in cases where central bank independence has been weak.
    Keywords: Inflation,Financial Structures,Macroeconomic Management,Energy Demand,Energy and Mining,Energy and Environment,International Trade and Trade Rules
    Date: 2019–07–09
  19. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: We consider a frictionless constant endowment economy based on Leeper (1991). In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hoc fiscal rule, there are two equilibria. One has active monetary policy and passive fiscal policy, while the other has passive monetary policy and active fiscal policy. We consider an extended set-up in which the policy maker minimizes a loss function under quasi-commitment, as in Schaumburg and Tambalotti (2007). Under this formulation there exists a unique Ramsey equilibrium, with an interest rate peg and a passive fiscal policy.
    Keywords: Frictionless endowment economy, Fiscal theory of the Price Level, Ramsey optimal policy, Interest Rate Rule, Fiscal Rule.
    JEL: E5 E52 E58 E6 E62 E63
    Date: 2020–02–05
  20. By: Richard Dennis; Oleg Kirsanov
    Abstract: We study discretionary monetary policy in an economy where economic agents have quasi-hyperbolic discounting. We demonstrate that a benevolent central bank is able to keep inflation under control for a wide range of discount factors. If the central bank, however, does not adopt the household’s time preferences and tries to discourage early consumption and delayed-saving, then a marginal increase in steady state output is achieved at the cost of a much higher average inflation rate. Indeed, we show that it is desirable from a welfare perspective for the central bank to quasi-hyperbolically discount by more than households do. Welfare is improved because this discount structure emphasizes the current-period cost of price changes and leads to lower average inflation. We contrast our results with those obtained when policy is conducted according to a Taylor-type rule.
    Keywords: Quasi-hyperbolic discounting, Monetary policy, Time-consistency
    JEL: E52 E61 C62 C73
    Date: 2020–02
  21. By: Mogaji, Peter Kehinde
    Abstract: Money neutrality is about what the long run relationship between money and price imply for the use of monetary aggregates in the conduct of monetary policy. The argument is that if a single monetary policy is prevalent in a monetary union, it is significant that members of such monetary integration should exhibit similarities in behaviour of money. The West African subcontinent (proposing monetary integration) deserves feasibility assessments in aspects of neutrality and superneutrality of money. This study, which is significant for the proposed monetary integration of the West Africa, provided answers to the question on if money matters within the proposed monetary union. The autoregressive distributed lag (ARDL) bound testing cointegration approach developed by Pesaran et al (2001) was employed to test money neutrality and money superneutrality in this research work. This cointegration method is no common in the investigation of neutrality and superneutrality of money. Relevant annual data (real output, quasi-money, inflation) collected for the six WAMZ countries (The Gambia, Ghana, Guinea, Nigeria, Liberia and Sierra Leone) for the purpose of this study span over the period between 1980 and 2014. Finding and results generated in this study produced evidence to suggest that money is not neutral in four of the six (except for Liberia and Guinea) WAMZ countries. The superneutrality tests (and other sensitivity tests) however reveal more uniform non-superneutrality of money across the WAMZ (apart from the inconclusiveness of the tests in the cases Liberia and Guinea when real exchange rate change was applied; as a well as the non-superneutrality of Liberia when real output growth served in the determination of money super neutrality).
    Keywords: Money Neutrality, Superneutrality of Money, ARDL, WAMZ
    JEL: E12 E13 E4 E5 F3 F45
    Date: 2018–07–12
  22. By: Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini
    Abstract: We examine the so-called "Neo-Fisherian" claim that, at the zero lower bound (ZLB) of the monetary policy interest rate, and the economy in a depression equilibrium, in order to restore the desired inflation rate the policy rate should be raised consistently with the Fisher equation. This claim has been questioned on the ground that the Fisher equation cannot be used mechanically to peg the long-run inflation expectations. It is necessary to examine how inflation expectations are formed in response to, and interact with, policy actions and the evolution of the economy. Hence we study a New Keynesian economy where agents' inflation expectations are based on their correct understanding of the data generations process, and on their probabilistic confidence in the central bank's ability to keep inflation on target, driven by the observed state of the economy. We find that the Neo-Fisherian claim is a theoretical possibility depending on the interplay of a set of parameters and very low levels of agents' confidence. Yet, on the basis of simulations of the model, we may say that this possibility is remote for most commonly found empirical values of the relevant parameters. Moreover, the Neo-Fisherian policy-rate peg is not sustained by the expectations formation process.
    Date: 2019
  23. By: Alex Entz (Research and Statistics Group); John McGowan; Asani Sarkar
    Abstract: The federal funds market is an important source of short-term funding for U.S. banks. In this market, banks borrow reserves on an unsecured basis from other banks and from government-sponsored enterprises, typically overnight. Before the financial crisis, the Federal Reserve implemented monetary policy by targeting the overnight fed funds rate and then adjusting the supply of bank reserves every day to keep the rate close to the target. Before the crisis, reserves were generally in scarce supply, which periodically caused temporary spikes in the fed funds rate during times of high demand, typically at the end of each quarter. In this post, we show that the Fed actively responded to quarter-end volatility by injecting reserves into the banking system around these dates.
    Keywords: fed funds market; quarter-end volatility
    JEL: E5 G1
  24. By: Rohan Kekre (University of Chicago - Booth School of Business); Moritz Lenel (Princeton University - Bendheim Center for Finance)
    Abstract: We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks.
    Keywords: monetary policy, risk premia, heterogeneous agents
    JEL: E44 E63 G12
    Date: 2020
  25. By: Mogaji, Peter Kehinde
    Abstract: This paper aims at investigating the fragility of banking sectors within the West African Monetary Zone and drawing inferences on the implications of the instability (or otherwise) of the banking systems for the proposed currency union in West Africa. As a matter of relevance and significance, the degree of fragility of the six banking sectors within the WAMZ was investigated so as to determine the extent to which this future currency union in prone to banking sector-induced financial instability which could bring the feasibility and sustainability of the currency union into jeopardy and doubt. Drawing from the theoretical underpinnings of probit model, multivariate probit regression models of banking sector fragility were constructed for the banking sectors in the member countries of the WAMZ. Determinants of the probability of crisis within these banking sectors were employed in multivariate probit models specification with annual data of these six WAMZ countries spanning over a period of time between 1980 and 2013 in which event approach was adopted in identifying episodes of banking problems over this 14-year period. The study noted the stability (or otherwise) of the Nigerian banking sector as paramount, conveying crucial implications for overall banking sector of the proposed WAMZ, given the country's banking strength and presence across the whole sub-continent. From the general outcomes of the probability tests of banking fragility across the WAMZ, banking systems within the zone portend moderate stability which gives assurance of a stable monetary integration of the WAMZ for now
    Keywords: Banking Fragility, Banking Stability, Probit Modelling, WAMZ
    JEL: F36 F45 G21
    Date: 2018–12–31
  26. By: Carlo Rosa; Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research)
    Abstract: The large-scale asset purchases (LSAPs) undertaken by the Fed starting in late November 2008 are widely considered to be a form of ?unconventional? monetary policy. Although these interventions are certainly unprecedented, this post shows that their effect on financial conditions is not that unconventional, in the sense that the relative effects of the LSAPs on returns across broad asset classes?nominal and real government bonds, stocks, and foreign exchange?are quite similar to those of more conventional policies, such as a reduction in the federal funds rate (FFR).
    Keywords: financial conditions; Monetary policy; asset prices
    JEL: E5 G1
  27. By: Lian An; Mark A. Wynne (Rice University); Ren Zhang
    Abstract: This paper studies shock-dependent exchange rate pass-through for Japan with a Bayesian structural vector autoregression model. We identify the shocks by complementing the traditional sign and zero restrictions with narrative sign restrictions related to the Plaza Accord. We find that the narrative sign restrictions are highly informative, and substantially sharpen and even change the inferences of the structural vector autoregression model originally identified with only the traditional sign and zero restrictions. We show that there is a significant variation in the exchange rate pass-through across different shocks. Nevertheless, the exogenous exchange rate shock remains the most important driver of exchange rate fluctuations. Finally, we apply our model to “forecast” the dynamics of the exchange rate and prices conditional on certain foreign exchange interventions in 2018, which provides important policy implications for our shock-identification exercise.
    Keywords: Inflation Forecasting; Narrative Sign Restrictions; Exchange Rate Pass-Through; Structural Scenario Analysis
    JEL: E31 F31 F41
    Date: 2020–02–12
  28. By: Laser, Falk Hendrik; Weidner, Jan
    Abstract: During recent years, central banks have increased the levels of their international reserves at an unprecedented pace. In this paper, we introduce new country-specific reserve data and examine determinants of the composition of inter- national reserves. Using a dataset of 36 countries (and the euro area) for the years from 1996 to 2016, we identify currency pegs and trade patterns as determinants of currency compositions. Our results emphasize the importance of transaction moti- ves for the composition of currency reserves. The euro crisis appears to have been a setback for the euro, which temporarily seemed to challenge the US dollar as the most important international reserve currency and potentially impacted the deter- mination of international reserve compositions.
    Date: 2020–02
  29. By: Anat Bracha; Jenny Tang
    Abstract: Inflation expectations are key to economic activity, and in the current economic climate of a heated labor market, they are central to the policy debate. At the same time, a growing literature on inattention suggests that individuals, and therefore individual behavior, may not be sensitive to changes in inflation when it is low. This paper explores evidence of such inattention by constructing three different measures based on the University of Michigan’s Survey of Consumers 1-year ahead inflation expectations. Exploring inflation thresholds of 2, 3, and 4 percent, our findings are consistent with the inattention hypothesis.
    Keywords: inattention; inflation expectations; Phillips curve
    JEL: D83 D84 E31
    Date: 2019–09–01
  30. By: Stefano Schiaffi; Stefan Avdjiev (Board of Governors of the Federal Reserve System (U.S.)); Leonardo Gambacorta (Bank für Internationalen Zahlungsausgleich; Centre for Economic Policy Research (CEPR)); Linda S. Goldberg
    Abstract: International capital flows channel large volumes of funds across borders to both public and private sector borrowers. As they are critically important for economic growth and financial stability, understanding their main drivers is crucial for both policymakers and researchers. In this post, we explore the evolving impact of changes in U.S. monetary policy on global liquidity.
    Keywords: US monetary policy; liquidity; international capital flows
    JEL: E5
  31. By: Saten Kumar (School of Economics, Auckland University of Technology)
    Abstract: This paper investigates the relationship between firms’ inflation expectations and their holdings of liquid assets. We implement a new quantitative survey of firms’ expectations about inflation in New Zealand. We find that firms that hold more shares of liquid assets systematically report lower inflation expectations. Moreover, we implement an experiment by providing firms new exogenous information about recent inflation dynamics. This experiment allows us to assess how firms respond to new information in terms of belief revisions and firm-level decisions.
    Keywords: liquid assets, illiquid assets, expectations, survey, inattention
    JEL: E2 E3
    Date: 2020–01
  32. By: Di Bartolomeo, Giovanni; Di Pietro, Marco; Giannini, Bianca
    Abstract: In a world where expectations are heterogeneous, what is the design of the optimal policy? Are canonical policies robust when heterogeneous expectations are considered or would they be associated with large welfare losses? We aim to answer these questions in a stylized simple New Keynesian model where agents’beliefs are not homogeneous. Assuming that a fraction of agents can form their expectations by some adaptive or extrapolative schemes, we focus on an optimal monetary policy by second-order approximation of the policy objective from the consumers’utility function. We find that the introduction of bounded rationality in the New Keynesian framework matters. The presence of heterogeneous agents adds a new dimension to the central bank’s optimization problem— consumption inequality. Optimal policies must be designed to stabilize the cross-variability of heterogeneous expectations. In fact, as long as different individual consumption plans depend on different expectation paths, a central bank aiming to reduce consumption inequality should minimize the cross-sectional variability of expectations. Moreover, the traditional trade-off between the price dispersion and aggregate consumption variability is also quantitatively affected by heterogeneity.
    Keywords: monetary policy; bounded rationality; heterogeneous expectations
    JEL: E52 E58 J51 E24
    Date: 2020–02
  33. By: Rehme, Günther
    Abstract: Silvio Gesell hypothesized that money depreciation is economically and socially beneficial, ideas that have often been contended. Here I analyze that in a Sidrauski model in which households additionally have a ‘love of wealth’-motive. It is shown Gesell’s claims may be valid in a demand-determined, short-run equilib- rium and why money depreciation overcomes the zero lower bound on nominal interest rates. However, for a typical long-run equilibrium introducing money de- preciation in isolation may be bad. But money depreciation, when coupled with expansionary monetary policy, is a necessary condition for a positive Mundell- Tobin effect on long-run real variables and so creates wealth in the model. It is found that this also holds in the transition to the long-run equilibrium. Hence, the spirit of Gesell’s hypotheses can be verified for a plausible, long-run environment.
    Date: 2018–06–25
  34. By: John Sporn; Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research)
    Abstract: Inflation has picked up in the last few months. Between June and November 2010, the twelve-month change in the seasonally adjusted consumer price index (CPI) was stable, at slightly above 1 percent, but it jumped to 3.1 percent as of last April. Higher food and energy prices have been an important factor behind this pickup in ?headline? inflation. However, core inflation has also increased; the year-over-year core CPI (excluding volatile food and energy prices) moved from a record low of 0.6 percent in October 2010 to 1.3 percent in April.
    Keywords: Owners' Equivalent Rent; Consumer Price Index; Core and Headline; Inflation
    JEL: E2
  35. By: Claudiu Albulescu (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Cornel Oros (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: Recent inflation dynamics in the United States (US) questioned the role of driving forces of inflation in the long run. Although the US recorded one of the longest economic recovery periods and the labor market conditions improved after the Global crisis, the inflation level remained relatively low. Starting from this evidence, the purpose of our paper is to shed light to the influence of inflation uncertainty and labor market conditions on the US inflation level. To this end, we first use two bounded measures of inflation uncertainty, relying on Chan et al.'s (2013) and Chan's (2017) unobserved component models. Second, we compare a linear with an asymmetric Autoregressive Distributed Lag (ARDL) framework. We show that both inflation uncertainty and labor market conditions explain the long-run US inflation. However, these results are sensitive to the way the inflation uncertainty is computed. Moreover, contrary to the recent affirmations regarding the vanishing role of labor market in explaining the US inflation in the long run, we show that the labor market influence is stronger in the post-crisis, compared with the pre-crisis period. Therefore, the monetary policymakers cannot make abstraction of labor market developments in anticipating the US inflation level.
    Keywords: E58,E31,NARDL,E24,bounded series,labor market,inflation uncertainty,US inflation
    Date: 2020–02–03
  36. By: Paolo Giudici (Università di Pavia); Thomas Leach (Università di Pavia); Paolo Pagnottoni (Università di Pavia)
    Abstract: The paper aims to assess, from an empirical viewpoint, the advantages of a stablecoin whose value is derived from a basket of underlying currencies, against a stablecoin which is pegged to the value of one major currency, such as the dollar. To this aim, we ?rst ?nd the optimal weights of the currencies that can comprise our basket. We then employ volatility spillover decomposition methods to understand which foreign currency mostly drives the others. We then look at how the stability of either stablecoin is affected by currency shocks, by means of VAR models and impulse response functions. Our empirical ?ndings show that our basket based stablecoin is less volatile than all single currencies. This results is fundamental for policy making, and especially for emerging markets with a high level of remittances: a librae (basket based stable coin) can preserve their value during turbolent times better than a libra (single currency based stable coin).
    Keywords: : Cryptocurrencies; Fintech; Stablecoins; Spillover; Variance decomposition.
    JEL: C01 C32 C58 G21 G32
    Date: 2020–02
  37. By: Alex Entz (Research and Statistics Group); Eric LeSueur (Markets Group); Gara M. Afonso
    Abstract: The fed funds market is important to the framework and implementation of U.S. monetary policy. The Federal Open Market Committee sets a target level or range for the fed funds rate and directs the Trading Desk of the New York Fed to create ?conditions in reserve markets? that will encourage fed funds to trade at the target level. In this post, we use various publicly available data sources to estimate the size and composition of fed funds lending activity. We find that the fed funds market has shrunk considerably since the financial crisis and that lending activity is now dominated by one group of market participants.
    Keywords: Fed funds; lending
    JEL: G1 G2 E5
  38. By: Joost Bats
    Abstract: This paper investigates whether ECB corporate sector purchases impact the funding structure of non-financial corporates. Regression models are estimated using a unique microdata panel, combining data on all Eurosystem corporate sector purchases and individual balance sheets of 672 non-financial corporations headquartered in the euro area with access to capital markets. The findings indicate that ECB purchases of corporate bonds reduce the dependence on bank financing of corporates whose debt is purchased. The effects vary according to corporates' interest paid, financial expenses and price-to-book ratio. In addition, this paper shows that the relationship between central bank purchases and corporates' dependence on bank financing is non-linear. The downward effect on bank dependence is largest for those corporates of which most debt is purchased under the CSPP, relative to their total stock of debt.
    Keywords: Non-financial corporates; bank dependence; ECB corporate sector purchases; monetary policy
    JEL: E44 E58 G10 G21
    Date: 2020–01
  39. By: Oliver Hülsewig; Johann Scharler
    Abstract: We explore the reaction of the euro area periphery sovereigns’ fiscal positions to an unconventional monetary policy shock. We estimate panel vector autoregressive (VAR) models over the period 2010-2018, and identify the shock by imposing sign restrictions. Our results suggest that the sovereigns’ fiscal positions improve in response to the economic expansion induced by an expansionary non-standard monetary policy innovation which lowers sovereign CDS spreads. Moreover, we observe that fiscal discipline is maintained rather than undermined.
    Keywords: euro area periphery sovereigns, fiscal position, unconventional monetary policy, panel vector autoregressive model
    JEL: E52 E62 H62 H63
    Date: 2020
  40. By: Allen, Franklin; Covi, Giovanni; Gu, Xian; Kowalewski, Oskar; Montagna, Mattia
    Abstract: This study documents significant differences in the interbank market lending and borrowing levels across countries. We argue that the existing differences in interbank market usage can be explained by the trust of the market participants in the stability of the country’s banking sector and counterparties, proxied by the history of banking crises and failures. Specifically, banks originating from a country that has lower level of trust tend to have lower interbank borrowing. Using a proprietary dataset on bilateral exposures, we investigate the Euro Area interbank network and find the effect of trust relies on the network structure of interbank markets. Core banks acting as interbank intermediaries in the network are more significantly influenced by trust in obtaining interbank funding, while being more exposed in a community can mitigate the negative effect of low trust. Country-level institutional factors might partially substitute for the limited trust and enhance interbank activity. JEL Classification: G01, G21, G28, D85
    Keywords: centrality, community detection, interbank market, networks, trust
    Date: 2020–02
  41. By: Lucia Esposito (Bank of Italy); Davide Fantino (Bank of Italy); Yeji Sung (Columbia University)
    Abstract: This paper evaluates the impact of the second series of Targeted Longer-Term Refinancing Operations (TLTRO2) on the amount of credit granted to non-financial private corporations and on the interest rates applied to loans in Italy, using data on credit transactions, bank and firm characteristics and a difference-in-differences approach. We find that TLTRO2 had a positive impact on the Italian credit market, encouraging medium-term lending to firms and reducing credit interest rates. While firms overall benefited from TLTRO2 irrespective of their risk category and size, we document heterogeneous treatment effects. Regarding firms’ risk category, the effects on credit quantities are larger for low-risk firms while those on credit interest rate are larger for high-risk firms. Regarding firms’ size, smaller firms benefited the most both in terms of amounts borrowed and interest rates. Furthermore, our evidence suggests that monetary policy transmission of TLTRO2 is stronger for banks with a low bad debt ratio in their balance sheets.
    Keywords: Unconventional Monetary Policy, Pass-through, Policy Evaluation
    JEL: E51 E52
    Date: 2020–02
  42. By: Icefield, William
    Abstract: John Hicks argued that liquidity preference theory and loanable funds theory are equivalent, because in general equilibrium, Walras law dictates that one (for example, money) market is redundant when other markets (bond, commodities) are in equilibrium. While there are many other well-known criticisms of this point, I take a route that is rarely invoked - that liquidity preference can encode agent's reactions against risk of disequilibrium in a general equilibrium model. In such a case, money market may be in equilibrium, especially due to endogenous money, while other markets are in disequilibrium. In such a case, liquidity preference theory - or theory of money demand - determines rate of interest, as John Maynard Keynes asserted in General Theory, instead of loanable funds theory.
    Keywords: liquidity preference; loanable funds theory; disequilibrium; general equilibrium; Keynes; Walras law
    JEL: B22 B41 D59 E12 E20 E43
    Date: 2020–01–10
  43. By: Olivier Coibion (University of Texas at Austin); Dimitris Georgarakos (European Central Bank (ECB) - Directorate General Research; Center for Financial Studies (CFS)); Yuriy Gorodnichenko (University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics); Michael Weber (University of Chicago - Finance)
    Abstract: We compare the causal effects of forward guidance communication about future interest rates on householdsÕ expectations of inflation, mortgage rates, and unemployment to the effects of communication about future inflation in a randomized controlled trial using more than 25,000 U.S. individuals in the Nielsen Homescan panel. We elicit individualsÕ expectations and then provide 22 different forms of information regarding past, current and/or future inflation and interest rates. Information treatments about current and next yearÕs interest rates have a strong effect on household expectations but treatments beyond one year do not have any additional impact on forecasts. Exogenous variation in inflation expectations transmits into other expectations. The richness of our survey allows us to better understand how individuals form expectations about macroeconomic variables jointly and the non-response to long-run forward guidance is consistent with models in which agents have constrained capacity to collect and process information.
    JEL: E31 C83 D84
    Date: 2020
  44. By: Matthew Higgins (National Bureau of Economic Research; Georgia Institute of Technology; Federal Reserve Bank of New York; College of Management); Thomas Klitgaard
    Abstract: The euro area sovereign debt crisis sparked an outflow of bank deposits from countries in the periphery to commercial banks in Germany and other core countries. The outflow highlighted a key aspect of the payments system linking national central banks in euro area countries. In particular, net outflows from private commercial banks in a given country are matched by credits to that county?s central bank, with those credits extended by central banks elsewhere in the euro area. In this post, we explain how the credits affected the adjustment pressures faced by countries in the euro area during the ongoing debt crisis.
    Keywords: Eurosystem euro area payments
    JEL: F00 G2
  45. By: Marco Cipriani (New York University; Federal Reserve Bank; Federal Reserve Bank of New York; George Washington University; National Bureau of Economic Research); Julia Gouny (Markets Group)
    Abstract: In February, the Federal Reserve Bank of New York?s trading desk announced it will publish a new overnight bank funding rate early next year. The new rate will be based on both federal funds and Eurodollar transactions reported in a new data collection?the FR 2420 Report of Selected Money Market Rates. In a previous post, we explained how FR 2420 fed funds transaction data will replace brokered data as the base for the fed funds effective rate. This post provides insights on the Eurodollar market in advance of the publication of the overnight bank funding rate.
    Keywords: Eurodollars; FR 2420
    JEL: G1 E5
  46. By: Andrea Tambalotti (Federal Reserve Bank of New York; Research and Statistics Group; Princeton University; New York University; National Bureau of Economic Research); Ging Cee Ng
    Abstract: The Great Recession of 2007-09 was a dramatic macroeconomic event, marked by a severe contraction in economic activity and a significant fall in inflation. These developments surprised many economists, as documented in a recent post on this site. One factor cited for the failure to anticipate the magnitude of the Great Recession was a form of complacency affecting forecasters in the wake of the so-called Great Moderation. In this post, we attempt to quantify the role the Great Moderation played in making the Great Recession appear nearly impossible in the eyes of macroeconomists.
    Keywords: Macroeconomics; Forecasting; Great Recession
    JEL: E2
  47. By: Jesús Fernández-Villaverde; Daniel Sanches; Linda Schilling; Harald Uhlig
    Abstract: The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank's contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation.
    JEL: E58 G21
    Date: 2020–02
  48. By: Daiki Maeda; Yuki Saito
    Abstract: To examine the effect of monetary policy on economic growth, we formulate an endogenous growth model with cash-in-advance constraints on R&D and capital accumulation as endogenous growth engines. Within this framework, we show that the relationship between economic growth and the nominal interest rate can be an inverted-U shape. Moreover, we demonstrate that the welfare-maximizing level of the nominal interest rate is larger than the growth rate-maximizing level of the nominal interest rate.
    Date: 2020–02
  49. By: Marco Del Negro; Carlo Rosa; Benjamin A. Malin; Jamie Grasing; Michele Cavallo; W. Scott Frame
    Abstract: In the wake of the global financial crisis, the Federal Reserve dramatically increased the size of its balance sheet?from about $900 billion at the end of 2007 to about $4.5 trillion today. At its September 2017 meeting, the Federal Open Market Committee (FOMC) announced that?effective October 2017?it would initiate the balance sheet normalization program described in the June 2017 addendum to the FOMC?s Policy Normalization Principles and Plans.
    Keywords: Central bank's balance sheet; remittances; monetary policy
    JEL: E5
  50. By: Adam Triggs; Warwick J McKibbin
    Abstract: In 2019, President Trump called on the U.S. Federal Reserve to cut interest rates to depreciate the U.S. dollar, which, according to the IMF, is overvalued by between 6 and 12 percent. This paper uses an intertemporal general equilibrium model to explore what would likely happen if the President’s wish was granted. Using the G-Cubed (G20) model, it shows that the general equilibrium effects of a depreciated real effective exchange rate brought about by lower U.S. interest rates can result in a wide variety of unintended consequences, many of which contradict the stated aims of President Trump and his administration. Such a policy would likely result in a larger U.S. trade deficit, would only temporarily devalue the real effective exchange rate and would only temporarily support the U.S. economy. The policy would boost the trade balances of most U.S. trading partners, depreciate China’s exchange rate and boost China’s GDP. Given the policy would make the overvalued exchange rates of many economies even more overvalued, the paper explores what would happen if U.S. trading partners were to retaliate by devaluing their currencies. It shows that this makes it harder for the U.S. to achieve its objectives and forces a more severe adjustment for economies that presently have undervalued exchange rates.
    Keywords: Econometric modelling, Computable general equilibrium models, productivity, monetary policy, fiscal policy, international trade and finance, globalization
    JEL: C5 C68 D24 E2 E5 E6 E62 F1 F2 F3 F4 F6
    Date: 2020–02
  51. By: Aguilar, Pablo; Fahr, Stephan; Gerba, Eddie; Hurtado, Samuel
    Abstract: This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for the Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al (2015). In this model, we find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher than the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit (GDP) 5% (0.8%) higher had optimal capital level been in place during the 2011-13 crisis. Further, we find that the optimal Countercyclical Capital Buffer rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from an optimal combination of instruments is higher than the sum of their individual effects due to synergies and spillovers.
    Keywords: Financial stability; global welfare analysis; financial DSGE model
    JEL: G21 G28 G17 E58 E61
    Date: 2020–02

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